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648
BO RD O GOVERNORS
O F T H
FEDER L RESERVE SYSTEM
W S H I N G T O N
X-9602
a d d r e s s o f f i c i a l c o r r e s p o n d e n c e
t o t h e b o a r d
June
2, 1936.
Dear
Sir;
There
are
inclosed,
for
your information,
copies
of a
letter dated April
14, 1936, and its in-
closures, received from
Mr.
Clark, Assistant Federal
Reserve Agent
at the
Federal Reserve Bank
of
Atlanta,
and of the
Board s reply thereto, with regard
to the
Board s Regulation
U,
Loans
by
Banks
for the
Purpose
of
Purchasing
or
Carrying Stocks Registered
on a
National
Securities Exchange.
Very truly yours
k>
a
v • j
Assistant Secretary
Inclosures.
TO ALL
FEDERAL RESERVE AGENTS.
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COPY
X-9602-
FEDERAL RESERVE BANK
OF
ATLANTA
April
14, 1936.
Mr. Ronald Ransom,
Board
of
Governors
of the
Federal Reserve System,
Washington,
D. C.
Dear Mr. Ransom:
At the request of Mr. , Vice
President of The National Bank of , I am trans-
mitting to you a memorandum that he has prepared of Regula-
tion
U.
Mr. is
anxious
to
have
a
meeting
of branch managers and credit officials of the main office
for the purpose of studying Regulation U. Prior to that
meeting
he
would like
to
have
the
benefit
of the
Board's views
as to
whether
the
statements contained
in the
memorandum
are
in accordance with the provisions of the regulation, and have
answered the questions raised in the second paragraph of item
1 and itfcm 5 under (A) and item 4 under (B).
Any
further interpretations
or
rulings that
the
Board might wish
to
give
in
this connection
I
know will
be
greatly appreciated
by Mr. .
With kindest regards,
I am
Very truly yours,
(Signed) L.
M.
Clark
L. M.
Clark,
Assistant Federal Reserve Agent.
enclosure
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X-9602-a
Under
the
above regulation
the
following points appear
of
interest
and are
apparently worthy
of
note:
A - Loans to brokers and dealers.
1. On all
loans made
to
brokers
and
dealers accompanied
by
Certificate
A , 60$ of the
market value
of the
collateral pledged
can be
loan-
ed if the
collateral consists
of
listed stocks.
When Certificate
A is
used
and the
collateral tendered includes
both listed
and
unlisted stocks, what percentage
of the
market
val-
ue of the
unlisted stocks
can be
used
as the
maximum loan value?
2. If accompanied by Certificate B , a loan signed by a broker or
dealer will not be subject to the regulation.
3. A
loan which
is not
accompanied
by
either Certificate must
not be
in
excess
of 45$ of the
market value
of the
stocks offered
as col-
lateral.
4. A
temporary loan
to a
dealer
for the
purpose
of
completing
a
trans-
action where securities
are
purchased against
a
bonafide order
is
not
subject
to the
regulation.
5. Does Item C of Section Two refer to the distribution of new issues,
exclusively,
or
will
it
include
the
distribution
of
issues already
outstanding
and
presently listed
on a
national exchange?
B - Loans to others than dealers and brokers.
1. If the
bank accepts
in
good faith Certificate
B ,
executed
by a bor-
rower,
the
loan
in
connection with which
it is
executed
is not sub-
ject to the regulations and the margin to be required is optional
to the bank.
2.
After
May 1,
when both secured
and
unsecured loans
are
made
to the
same borrower
at the
same time
or at
different times,
the
total
in-
debtedness
of
that borrower must
not
exceed
the
maximum loan value
of the collateral as prescribed in the regulation and any loan not
considered in the total must be accompanied by Certificate B .
3.
According
to our
attorneys
and
according
to the
attorneys
of the Fed-
eral Reserve Bank, the regulation does not in any way restrict the
substitution or release of collateral securing loans which were in
existence prior
to the
effective date
and
which have
not
been increas
ed
except
as
provided
for in the
regulation.
4. Does item L of Section Three intend to include bonds convertible
into stock
at the
option
of the
holder
or
carrying warrants entit-
ling
the
holder
to
purchase stock under certain conditions?
4-14-36
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651
X-9602-a
CERTIFICATE
A
April
1956.
National Bank
of
z
» •
Dear Sirs:
For the
purpose
of
enabling
you to
make
a
loan
to me in
excess
of 45% of the
current market value
of
certain stocks registered
on a
national securities
ex-
change which I will pledge to you as security for said
loan, I certify that
1.
2.
Yours very truly,
I am
subject
to the
provisions
of
Regulation
T of the
Board
of
Governors
of the
Federal
Reserve System, prescribed
in
pursuance
of
the
Section
7 of the
Securities Exchange
Act
of 1954
or
(indicate which)
I do not extend or maintain credit to or for
customers except
in
accordance with such
Reg-
ulation
T as if we
were subject thereto,
and
That the securities hypothecated to secure said
loan
are
securities carried
for the
account
of
my
customers other than
my
partners.
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652
X-9602-a
CERTIFICATE
B
I hereby certify thi.t the loan evidenced by
this note
is not
being obtained
for the pur-
pose
of
purchasing
or
carrying stocks regis-
tered
on a
national securities exchange
and
that
the
proceeds will
not be
used
for
either of said purposes.
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653
X-9602-b
May 20, 1936.
Mr. L. M.
Clark
Assistant Federal Reserve Agent
Federal Reserve Bank
Atlanta, Georgia
Dear Mr. Clarkj
Reference is made to your letter of April 14 to Governor Ransom, en-
closing
a
memorandum
on the
subject
of
Regulation
U
prepared
by Mr. ,
Vice President, (national bank),
and to the
copy
of Mr.
Parker's letter
to Mr. of
April
21
which
was
forwarded
to the
Board.
The
statements made
and the
questions asked
in the
memorandum appear
to
relate to matters upon which you may receive further inquiries, and for this
reason they will be discussed somewhat fully. They will be treated in the
order
in
which they appear
in the
memorandum.
A-l. Stocks which are not registered on a national securities ex-
change have
a
maximum loan value
of 45
percent when serving
as
collateral
for a regulated loan, even in the case of a loan to a broker made in accor-
dance with the second paragraph of the supplement to Regulation U. It is
only registered stocks that have,
in
this case,
a
loan value
of 60
percent.
A-2. The Board does not feel that it should attempt to approve or dis-
approve, at the present time at least, the forms which banks may employ in
complying with
the
provisions
of
Regulation
U. To do so in any
particular
instance might have
the
result that requests
for
approval
of
many forms
would
be
made
of the
Board
by
many banks.
In
this connection
it
should
be
pointed
out
that such certificates
are not
required
by the
regulation
but
the bank is permitted to rely upon them if it obtains them in good faith.
A -3. It may be
noted that neither Certificate
'A' nor
Certificate
•B' attached to the memorandum relates to loans which are excepted by the
provisions
of
section
2 of
Regulation
U. It is not,
therefore, correct
to
say
that
a
loan which
is not
accompanied
by
either certificate must
not
be in
excess
of 45
percent
of the
market value
of the
stocks offered
as
collateral.
A-4. A
loan
of the
following description comes within
the
provisions
of section 2(f) of Regulation U:
A
dealer
in
securities receives
an
offer from
a
customer
to
purchase
a
registered stock.
It is
agreed between
the
dealer
and the customer that the dealer will deliver the stock to the
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—2—
X-9602-b
Customer promptly, and that the customer will pay for the stock
promptly upon delivery of the security. The dealer purchases
the
security, instructing
the
seller
to
deliver
it to a
desig-
nated bank against payment. The bank, knowing the facts of the
case and understanding that it will be repaid by the dealer as
soon as the dealer can arrange for his customer to take delivery
of and pay for the stock, makes a loan to the dealer for the pur-
pose
of
paying
the
seller
of the
stock.
If Mr. has in mind a case differing from that described above,
it is suggested that he address a new question to you, giving you the facts
of his case.
A-5. It is
suggested that
in
order
to
assist
the
Board
in
answering
this question, which relates
to the
interpretation
of
section
2(c) of
Regu-
lation
U, you ask Mr. to
give
you a
specific case, describing
in
some detail
the
exact nature
of the
operation which
the
bank
is
being asked
to
finance.
B-l. If a
given loan
is not for the
purpose
of
purchasing
or
carry-
ing a
stock registered
on a
national securities exchange ,
a
bank
may
make
the
loan without being required
to
obtain
the
margin prescribed
by
Regulation
U. Withdrawals and substitutions of collateral securing any such loan are
not subject to the regulation unless the collateral secures also a loan for
the purpose specified in section 1 of the regulation.
B-2. The question which the memorandum seeks to answer is not alto-
gether clear.
If
this question
is how a
loan which
is
made after
May 1 for
the
purpose
of
purchasing
or
carrying registered stocks,
but
which
is un-
secured, shall be treated in the event that the bank makes, or has made,
another loan
to the
same borrower after
May 1 for the
same purpose secured
by
a
stock,
the
answer
is as
follows:
If a
bank
has
outstanding
to a
borrower
no
loan whatever which
is
secured directly
or
indirectly
by any
stock,
any
loan
by the
bank to such borrower, even if the purpose of the loan be to purchase or
carry registered stocks,
is not
subject
to the
regulation,
if it is it-
self not secured by any stock. If, however, a bank has outstanding a
loan to a borrowe which, by reason of its purpose and its collateral,
is subject to Regulation U, the bank may not make to the borrower any
additional loan secured, under a general loan agreement, by stock
securing the first loan or by other stock and for the purpose of pur-
chasing or carrying registered stock unless the bank obtains the margin
on the additional loan required by the regulation.
If a bank has outstanding a loan to a borrower which is un-
secured or which is not secured by any stock, and is, therefore, not
subject
to
Regulation
U, it may
make
a
second loan which
is
subject
to the
regulation, without regard
to the
status
of the
first loan,
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655
—5—
X-9602-b
i.e., if the bank obtains additional collateral with a maximum loan
value at least equal to the amount of the second loan. Thereafter,
however, if the bank permits withdrawals or substitutions of col-
lateral for either loan, it is obliged to ascertain the purpose of
the
first loan.
If the
first loan
was for the
purpose
of
purchasing
or
carrying registered stocks,
the two
loans must
be
treated
as a
single loan,
and all the
collateral securing both loans must
be con-
sidered
in
determining whether
or not the
contemplated withdrawals
or
substitutions
may be
made.
B-5. As a
general rule,
the
provisions
of
Regulation
U are not
appli-
cable to the withdrawal or substitution of collateral for any loan made prior
to May 1, 1956. This general rule is subject, however, to one qualification:
If a bank has made another loan on or after that date (other than a loan ex-
cepted fcy section 2 of the regulation) which is secured directly or indirect-
ly by any stock and is for the purpose of purchasing or carrying a stock
registered on a national securities exchange, and if the terms of the bank's
agreements with the borrower are such that the collateral securing the first
loan also secures
the
second loan,
the
bank must then combine
the
collateral
for
both loans
in
determining whether
any of the
collateral
for
either loan
may be
withdrawn.
The
bank
may not, in
this case, permit withdrawal
of
such
an
amount
of
collateral
as
would cause
the
maximum loan value
of the
remain-
der to be
less than
the
amount
of the
second loan.
B-4. The term stock as used in section 3(1) of Regulation U does not
include any bond, even a bond convertible into stock, or a bond carrying
stock purchase warrants.
Very truly yours,
(Signed) Chester Morrill
Chester Morrill
Secretary